JBTX wrote: ↑
Wed Mar 27, 2019 9:47 pm
EnjoyIt wrote: ↑
Wed Mar 27, 2019 7:30 pm
JBTX wrote: ↑
Wed Mar 27, 2019 5:31 pm
EnjoyIt wrote: ↑
Wed Mar 27, 2019 5:15 pm
JBTX wrote: ↑
Wed Mar 27, 2019 4:25 pm
While you have $30k in mortgage, you will have offsetting interest revenue. Plus you have the $250k balance to pull from for things like Roth conversions if needed.
Everybody always remembers the mortgages expenses but forgets the offsetting revenue and the fact that you are sitting on the mortgage balance in cash.
2.75 is almost inflation.
It is like saying I'm going to eliminate grocery expense by buying a years worth of groceries in advance. Prepaying doesn't eliminate expenses. It just changes the timing of them.
Did you run the two scenarios doing Roth conversions every year with and without the mortgage? No? Well I have and I used 5% growth on that money on top of it. Trust me, the math works out because an extra $30k already puts me $6k over the standard deduction limiting my conversion space. The $30k cuts significantly into my Roth conversions which will affect taxes throughout my entire retirement which is exacerbated even further when SS kicks. If you think I'm wrong, do the math on a 70/30 portfolio with 50% of assets in a 401k living on $100k/yr. Mortgage has 8 more years left before it is paid off on its own.
You really don't need to do the math to know that paying off a mortgage at a rate of X does not put you in a better position vs keeping mortgage at rate of X and investing the proceeds at rate of X.
Edit: are you saying the interest from the mortgage proceeds limits your ability to do Roth conversions? Maybe but that seems like a stretch.
By not doing the math you are talking out of your ear.
In this particular scenario at what tax bracket should I do Roth conversions?
You do realize the more money I need to take out to live on the higher my tax bracket is when I want to do Roth Conversions. By having an extra $30k mortgage I am limited how much I can covert because it puts me in a higher tax bracket making the conversion not worth it.
In this scenario there is 1.375 million in a 401k which we want to convert as much as possible to a Roth to minimize total taxes. Is it worth missing out on arbitraging a 2.75% loan for a few years and instead save 10% or more in taxes every year on RMD and SS dispersant on a significant portion of your living expenses every year till death?
Now think about the math for just a minute and tell me if the 2.75% loan arbitrage is worth it?
I guess what I'm not getting is how paying $30,000 per year in mortgage increases your taxable income by $30,000. You don't have to pull ira money out to pay it. You pay it with the $250k you have sitting there you would have used to pay it out. Now the $250k would generate $5000-$6000 of taxable interest income.
On the flip side, where is this $250k you have right now? Will it generate capital gains upon liquidation? If you are concerned about recognizing capital gains while doing conversions, you could recognize them up front, just like you would do if you paid the balance off all at once.
Sorry if I'm missing it. I don't see how maintaining your mortgage causes you to miss out on $30k of Roth conversions every year.
Having said all that, if it's only 8 years left on the mortgage, it isn't that big of an impact either way.
Sure, I will explain. First I want to make sure you understand that the process of converting money from a 401k to a Roth IRA is a taxable event. Every dollar converted is taxes at your top tax rate.
Let's look at 2 scenarios and how they may look.
Scenario 1: living expenses are $100k/yr since this person retired early, they will need to withdraw money from their taxable account. For arguments sake and to make math easy we will have $30k in dividends and another $70k in the sale of equities with 50% capital gains. This means this person has $65k in taxable income. After the standard deduction of $24k this family has $41k in taxable income which puts them in the 12% tax bracket which peaks at $78,950 for a family in 2019. This person will be paying $0 taxes on their qualified dividends and long term capital gains. In fact, this person can now convert ($78,950 - $41,000 = $37,950) from a 401k to a Roth and pay 12% taxes on that conversion but still pay 0% on the capital gains. If this person converts $1 more, that dollar will put them in the 22% tax bracket where now qualified dividends and long term capital gains are also taxed at 15%. This is not where I want to be.
Scenario #2 is exactly the same but now I also have a $2,500 per month mortgage which comes out to $30k/yr. If we agreed we are selling equities at 50% capital gains to meet our expenses needs, we will incur an extra $15k in capital gains. Therefore instead of having $41k in taxable income I will have ($41k + $15k = $56k.) This means I can now only convert ($78,950 - $56,000 = $22,950) from a 401k to a Roth. Sure I can convert more, but any extra will be at 22% tax bracket which would not make financial sense.
In this example, the extra $15k Roth conversions add up over the years which surpass the arbitrage of holding a 2.75% mortgage.
I hope I explained it so it makes sense.
Other good reason some may not want a mortgage in retirement:
1) The mortgage payment may put a family outside of ACA subsidies
2) An early retire might still have kids going to college. They may have all their wealth in a 401k doing SEP withdrawals for living expenses. Keeping their withdrawals low may qualify them for need based financial aid.
I'm sure there are other tax cliff reasons why lowering your yearly spending is helpful.